Resolving The Conundrum Of Enforceability Of Unstamped Arbitration Agreements

In a recent groundbreaking decision, a seven judge bench decision of the Hon’ble Supreme Court, has delivered a significant ruling that the Court can appoint arbitrators even on unstamped or inadequately stamped agreements. The seven bench decision titled as “In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899” has disagreed with the 5 judge bench in NN Global (2) which which had held that the courts cannot appoint arbitrators on unstamped arbitration agreements.

There are two opinions in this decision: the majority opinion, delivered by J. DY Chandrachud, and a concurring opinion, delivered by Justice Khanna, marks a pivotal moment in the legal and commercial landscape.

Key Conclusions:

The comprehensive conclusions reached by the majority view are as follows [1]:

• Agreements lacking proper stamping are deemed inadmissible under Section 35 of the Stamp Act, but they are not automatically void, void ab initio, or unenforceable.

• Non-stamping or inadequate stamping is merely a curable defect.

• Objections related to stamping should be addressed by the arbitral tribunal, and not by the court under Section 8 or Section 11 of the Arbitration Act

• NN Global Mercantile Pvt Ltd v Indo Uniqie Flame Ltd (2023) 7 SCC 1 (‘NN Global 2’) and SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 (‘SMS Tea Estates’), have been overruled.

• Paras 22 and 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 (‘Garware Wall Ropes’) have been overruled.

Maintainability of the Petition:

The court, in determining the maintainability of the petition, relied upon the exception laid down in the case of Central Board of Dawoodi Bohra Community v. State of Maharashtra (2005) 2 SCC 673 (‘Dawoodi Bohra’) that ‘if the matter has already come up before a bench of larger quorum, and that bench itself feels that the view of the law taken by a bench of lesser quorum requires reconsideration, then by way of exception and not as a rule and for reasons given by it, it may proceed to hear the case’[2]

The majority held that the interpretation and application of arbitration law in India, which in turn has implications for business and commerce in the country merits reliance upon the exception laid down in Dawoodi Bohra (supra)[3]

Inadmissibility vs. Voidness:

The crux of the court's reasoning lies in distinguishing between inadmissibility and voidness[4].

Dealing with Para-109 of NN Global 2 (supra), the court held that the 5 judge bench was erroneous as it conflated the distinction between enforceability and admissibility [5].

The majority held that:

• Merely because an agreement is void, does not impact its admissibility in evidence.[6]

• While Section 35 of the Stamp Act renders a document inadmissible, it does not render the underlying agreement void.

• Section 2(j) of the contract act is not attracted when an instrument is rendered inadmissible under Section 35 of the Stamp Act, and the result of the latter is not to render an unstamped agreement unenforceable[7].

Separability Principle and Jurisdiction under Section 16:

The issue of stamping was considered a preliminary jurisdictional matter falling within the arbitral tribunal's purview.

The court underscored the separability principle under Section 16 of the Arbitration Act, asserting that the arbitration agreement remains valid independently of the underlying contract's validity[8].

The majority expressly held that the reasoning given by NN Global 2 (supra) that the separation principle was not applicable to Section 33 and 35 of the Stamp Act is against the separable presumption incorporated under Section 16 of the arbitration act[9].

Affirming the decision of Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455, (‘Northern Coal Field’), the majority held that the scope of an arbitral tribunal’s authority under Section 16 is wide enough to comprehend all preliminary issues affecting jurisdiction, including the sufficiency of adequacy of stamping.[10]

The court also relied upon the principle of negative kompetenz-kompetenz to support the reasoning.[11]

Section 11(6A) and Examination of Arbitration Agreements

Examining the scope of Section 11(6A) of the arbitration act, the court clarified that Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 (‘Vidya Drolia’) is erroneous to the extent that it proceeded on the premise that Section 11(6A) has been omitted, even when this omission was not really notified [12]

Elaborating more on this Section, it was held that the scope of examination under this Section must be confined to the existence of an arbitration agreement on the basis of Section 7 and that the validity of an arbitration agreement in view of Section 7 should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing [13]

Harmonious Construction of Laws:

Relying upon Hindustan Steel Ltd. v. Dilip Construction Co., (1969) 1 SCC 597 (‘Hindustan Steel’), the court held that the purpose of the Stamp Act is not to arm a litigant with the weapon of technicality to meet the case of his opponent, but is to merely secure the revenue of the State[14].

On the other hand, the primary principles on which the Arbitration and Conciliation Act, 1996 is based are the principles of party autonomy[15] and the principle of minimum judicial interference[16] which are specifically incorporated under Section 5 of the Arbitration Act. Thus, the majority held that every provision of the arbitration act ought to be construed in view of the objects of Section 5 of the act, which is to minimise judicial intervention[17].

The majority held that the arbitration act will have primacy over the Stamp Act and contract act[18]. This was done relying upon two rules of interpretation:

• Firstly, the court relied upon the doctrine of Generalia specialibus non derogant to hold that the Arbitration Act which is a special law, will prevail over the Indian Contract Act and Stamp Act, which are general laws[19].

Thus, the court held that that sections 35 and 33 could not be allowed to operate in the proceedings under Section 11 or Section 8 and held that the interpretation of NN Global 2 (supra), rendered Section 5 otiose[20].

• Secondly, the court relied upon the fact that the Parliament was aware of the Stamp Act when it enacted the arbitration act and held that the Stamp Act does not specify stamping as a pre-condition to the existence of a valid arbitration agreement.[21]

The court contrasted the phrase ‘existence of the arbitration agreement’ appearing in Section 11(6-A) of the Arbitration Act  with Section 33(2) of the Stamp Act which also uses the word “examine.”[22]

Harmonizing the three statutes, the court held that the issue of stamping being decided under Section 16 of the Arbitration Act by the Arbitral Tribunal would take care of objects of both the acts, since the object of realisation of stamp duty is not really defeated, and at the same time, arbitration proceedings are not stalled[23].

It also held that allowing such an objection to be taken at the time of Section 8 or Section 11 application, would defeat the intention of the arbitration act as the question whether the stamp has not been paid or has been underpaid is a question that can only be decided after adducing strong enough evidence[24]

Further, the interests of revenue are not jeopardised in any manner because the duty chargeable must be paid before the agreement in question is rendered admissible and the lis between the parties is adjudicated[25]

Certified copy of the Arbitration Agreements

Finally, the majority also clarified the law laid down in Jupudi Kesava Rao and Hariom Agrawal to hold that an arbitration agreement certified copy is not rendered void or unenforceable only because it is unstamped or insufficiently stamped[26], and thus the referral court under Section 11 is not required to examine whether a certified copy of the agreement/ instrument/ contract discloses the fact of payment of stamp duty on the original[27]

Conclusion

This landmark decision clarifies the long standing debate as to whether unstamped arbitration agreements can be acted upon. It also establishes a harmonious framework for the interplay between the Arbitration Act, Stamp Act, and Contract Act. The legal community has grappled with uncertainties regarding the fate of such agreements, and this decision provides much-needed clarity. At the same time, this decision leaves open other questions as to interplay between Section 9 and Section 17 of the arbitration act and the Stamp Act, which may be hopefully resolved by a future bench.

 —————————————————————-

[1] Para 224

[2] Para 27

[3] Para 28, In Re Arbitration

[4] Para 44, In Re Arbitration

[5] Para 47, In Re Arbitration

[6] Para 45, In Re Arbitration

[7] Para 53, In Re Arbitration

[8] Para 112, In Re Arbitration

[9] Paras 113 – 114, In Re Arbitration

[10] Para 126, In Re Arbitration

[11] Para 132, In Re Arbitration

[12] Para 152, In Re Arbitration

[13] Para 154, In Re Arbitration

[14] Para 60, In Re Arbitration

[15] Para 64 – 68, In Re Arbitration

[16] Paras 69 – 82, In Re Arbitration

[17] Para 82, In Re Arbitration

[18] Para 166, In Re Arbitration

[19] Para 167, In Re Arbitration

[20] Para 175, In Re Arbitration

[21] Para 177, In Re Arbitration

[22] Para 177, In Re Arbitration

[23] Para 184, In Re Arbitration

[24] Para 185, In Re Arbitration

[25] Para 195, In Re Arbitration

[26] Para 217, In Re Arbitration

[27] Para 218, In Re Arbitration

Section 37(2)(b) - Grounds of appeal against interim measures

This article seeks to examine the grounds on which an interim order under Section 17 of the Arbitration and Conciliation Act, 1996 (‘the act’) can be challenged in an appeal under Section 37 of the act. Specifically, the article seeks to examine whether unilateral appointment of sole arbitrator is a valid ground to set aside a Section 17 order.

Section 17 - Interim measures ordered by arbitral tribunal

Section 17 of the Arbitration Act deals with the interim measures that can be ordered by the Arbitral Tribunal. Section 17(1) provides that any party may apply to the arbitral tribunal for the following interim measures:-

• Appointment of guardian of minor for the arbitral proceedings [S. 37(1)(i)]

• Preservation, interim custody or sale of goods [S. 37(1)(ii)(a)]

• Securing the amount in dispute [S. 37(1)(ii)(b)]

• Detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration [S. 37(1)(ii)(c)]

• Interim Injunction or Appointment of receiver [S. 37(1)(ii)(d)]

• Any other relief [S. 37(1)(ii)(e)]

While Section 9 of the act deals with the Interim Measures, etc. by the court, Section 17 deals with the interim measures by the arbitral tribunal. Before the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), there was a stark distinction between the two sections which has been noted by the Supreme Court in Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619. Examining the nature of power provided by Section 17, the court in MD Army Welfare Housing (supra) held that ‘an Arbitral Tribunal is not a court of law. Its orders are not judicial orders’[1], and that the power under Section 17 is a limited one[2]

The above position has been overturned by the 2015 Amendment with the insertion of S. 17(2) which provides that “any order issued by the arbitral tribunal under this section shall be deemed to be an order of the Court for all purposes”, thus bringing Section 9 and Section 17 at par[3].

Section 37 - Appealable Orders

S. 37 of the act deals with ‘Appealable Orders’. S. 37(1) which starts with a non-obstante clause provides that an appeal shall lie from the order enumerated in the Section (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order.

S. 37(2)(b) specifically provides that an appeal shall lie to the court from an order of the arbitral tribunal ‘granting or refusing to grant an interim measure’ under Section 17 of the act.

While S. 37 specified that an appeal would be maintainable against an order passed by the arbitral tribunal under Section 37, it is silent on the grounds which such an appeal can be filed. This gap has led to the various high courts laying down the scope of this section when the appellate court is faced with an interim order passed under Section 17 of the Arbitration Act.

First Restriction – Party to the arbitration agreement

It is to be noted that the first restriction posted in the section is explicitly mentioned in S. 17 itself. S. 17(1) allows only a ‘party’ to approach the arbitral tribunal for interim measures. A ‘Party’ has been defined under S. 2(1)(h) of the Act to mean a party to the arbitration agreement. Arbitration Agreement has been defined under Section 7(1) of the Arbitration Act to mean ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’.

Thus, it is has been held in Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678 in the context of S. 9(1) which is pari materia to S. 17(1), that a relief under Section 9 cannot be granted to a person who is not a party to the arbitration agreement. The principle has been expanded subsequently to hold that not only can a party apply to the arbitral tribunal for interim relief, such interim relief can not be granted against a third party[4].

This rule, however, would be subject to the exceptions laid down by the Supreme Court in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein arbitration has been allowed in the cases of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights[5]

Second Restriction – ‘Wander v Antox’ Principle

The second way in which the courts have dealt with Section 17 orders is to treat it how an appellate court would while dealing with appeals against interim injunctions passed under Order XXXIX Rules 1 and 2 or Order XXXVIII Rule 5. It is to be noted that the power under Section 17 is to be guided by the exercise of Order 39 Rules 1 and 2 or Order XXXVIII Rule 5 as provided in the CPC[6].

In the case of civil suits, the classic proposition as to how the appellate courts are to deal with challenges to an interim order has been laid down by the Supreme Court in Wander Ltd. v. Antox India (P) Ltd. 1990 Supp SCC 727 as under,

14. The appeals before the Division Bench were against the exercise of discretion by the Single Judge. In such appeals, the appellate court will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by that court was reasonably possible on the material….If the discretion has been exercised by the trial court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion.

The principle has been adopted in the context of arbitration by the Delhi High Court in the case of Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464, wherein it has been held the appellate court should not interfere with such discretion if the view taken by the Tribunal is a plausible view and does not suffer from any ‘perversity’[7]

‘Perversity’ as a ground for setting aside the interim order

While Wander (supra) and Shiningkart (supra) specifically imported perversity as a ground for setting aside the Section 17 order, the phrase has been vastly expanded by subsequent judgments.

In Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654, the Delhi High Court was dealing with a challenge to an order passed under Section 17. While dealing with the scope of interference under Section 37(2)(b) of the Act, the court not only applied[8] the principle laid down in Wander (supra) but went ahead to apply Dinesh Gupta v. Anand Gupta, 2020 SCC OnLine Del 2099 and Augmont Gold (P) Ltd. v. One97 Communication Limited, (2021) 4 HCC (Del) 642 and to hold that “the considerations guiding exercise of appellate jurisdiction under Section 37(2)(b) are, fundamentally, not really different from those which govern exercise of jurisdiction under Section 34 of the 1996 Act”

Further, in World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731, the Delhi High Court similarly held that the considerations which apply to Section 34 would also apply to Section 37(ii)(b)[9]

The above mentioned dicta suggests that it would be possible to challenge the order passed under Section 17 on the ground that the Arbitrator was unilaterally appointed by one of the parties in contravention of Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

Another case of the Kerala High Court - Hedge Finance v Bijish Joseph[10] also suggests that such an approach would indeed be possible. The Kerala High Court has taken a different approach to come to the conclusion that a challenge to the jurisdiction of the arbitrator could be raised in any collateral proceedings. The Ld. Single Judge of the Kerala High Court was dealing with a challenge to the Section 17 order raised during execution proceedings under Section 17(2) of the Act and framed the issue as to whether “an interim award passed by an ineligible Arbitrator be enforced through a Court under Section 17 (2) of the Act”[11]

Answering the question in the negative, the court applied Chiranjilal Shrilal Goenka v Jasjit Singh, (1993) 2 SCC 507 wherein it has been held that since an order passed by a court without jurisdiction would be a nullity and the challenge to such an order could be raised even at the stage of execution and even in collateral proceedings, and held that a Section 17 order can be set aside in execution proceedings since once “the infrastructure collapses, the superstructure is bound to collapse”.

Conclusion

A perusal of the above case law would suggest that the grounds that can be taken in appeal under Section 37 when an order passed under Section 17 are as under:

·       That the party who has filed the application is not a party to the arbitration agreement

·       Principles of Wander v Antox – that the order is arbitrary, capricious and perverse

·       Grounds specified under Section 34 of the act

Thus, it can be safely concluded that the scope of S. 37 has been expanded and now the grounds that would be available under Section 34 of the act can also be taken in an appeal under Section 37 of the act. The views of various High Courts also suggests that it is possible to raise the ground of unilateral appointment of an arbitrator even at the stage of appeal under Section 37 to an interim order under Section 17 of the Act.

It is submitted that the above approach is welcome and is consistent with the objects of the arbitration act as such an approach would also iron and smooth out the issues with respect to jurisdiction at the beginning of the arbitration itself whenever an order under Section 17 is challenged. Such an approach would also prevent multiplicity of proceedings as such a plea can be raised even before the filing of a petition under Section 14 of the Act, and would act as a check on the power of an arbitrator appointed illegally.

References 

[1] Para 43, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[2] Para 58, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[3] The position and the background for adding S. 17(2) has been examined by the Supreme Court in Paras 70 – 72, Amazon.com NV Investment Holdings LLC v. Future Retail Ltd., (2022) 1 SCC 209

[4] Para 53, Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678

[5] Para 103.1, Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

[6] Para 29, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464; Para 16, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[7] Para 40, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464

[8] Para 8, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[9] Para 67, World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731

[10] https://www.casemine.com/judgement/in/632e88ad66c77f7b4ff23313; https://www.legaleraonline.com/pdf_upload/hedge-finance-pvt-ltd-v-bijish-joseph-765787.pdf

[11] Para 23, Hedge Finance v Bijish Joseph (supra)